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Tax Reform Is Hard

Reports today indicate that House Speaker John Boehner is going to make tax reform the centerpiece of his jobs program later today. Tax reform is, I think, an excellent idea that could do something to make America more prosperous over the long run. In terms of addressing the jobs crisis, it’s not much better than the snakes strategy but it’s something. One problem here, however, is that, as Diane Lim Rogers argues, a serious pro-growth tax reform can’t just be more deficit-financed tax cuts for the rich, which, realistically, is what Boehner is going to propose.

A larger issue here is that serious pro-growth reform is simply extremely difficult to enact. It’s easy to kind of screw around with the tax code in little ways, but the big changes that could make a big difference are very hard to make. Consider, for example, American tax policy’s lavish subsidization of churches and other religious institutions. This is, in essence, the ultimate failed industrial policy boondoggle. And yet, it’s not going anywhere.

We’re not Aztecs who think erecting majestic religious structures is going to produce the favor of the gods which produces good weather which produces high agricultural yields. In that theological scheme, investing public resources in subsidized religious structures makes perfect sense. In fact, it’s mission-critical public infrastructure. They built temples to ensure the productivity of their corn fields, we build freight rail lines to ensure that the corn can be moved to market in a cost-effective way. The difference is that freight trains really do let you carry agricultural products efficiently while grand temples don’t increase yields. But instead of deciding that the problem with public subsidies for religious structures is that they’re a waste of resources, we’ve decided that the problem is they’re unfair. So rather than taxing productive work to support a particular socialist state religion, we use the charitable deduction from the income tax and the exclusion of churches from property taxes to create a broad-based subsidy of a diverse set of religious institutions.

That this is wasteful isn’t even remotely controversial. It’s clear that the elasticity of investment in religious structures is very high, with rich congregations and poor congregations inhabiting wildly different structures. Yet nobody denies that in God’s eyes, a humble church full of sincere worshippers is just as good as the grandest one imaginable.

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So why don’t we scrap it? Well, we don’t scrap it because economic efficiency isn’t the real issue here. Religious institutions have positive affect. Clergymen are good people. We like them, and we like piety. We also like doctors and nurses. Homeownership is a good thing. The person who wants to hustle a little bit to afford a downpayment on a new home is a worthy striver, totally unlike the person who wants to hustle a little to afford some gold chains. We subsidize things that sound like things a nice, responsible person would do. Buy a home. Donate money to a church and to your alma mater. But you get the real productivity gains from tax reform precisely by goring those oxen and redirecting resources to crasser sectors of the economy. Talking about corporate jets is better messaging because that loophole is in there for purely corrupt reasons, but by the same token, it’s not a huge deal in the scheme of things. To make the gains, you need to tackle the deductions that sound good.